Investors Renew Appetite for Europe's CoCo Bonds
25 August 2016 - 3:26AM
Dow Jones News
By Christopher Whittall
A complex form of European bank debt has made a comeback in
recent weeks, in the latest sign that investors are willing to take
on higher amounts of risk in their search for positive returns.
Barclays PLC is expected to add to a string of recent sales of
so-called contingent convertible -- or CoCo -- bonds Wednesday.
These securities fell sharply out of favor with investors earlier
this year following concerns German lender Deutsche Bank AG might
fail to make interest payments on some of its bonds. (It made the
payments.)
But the market for new sales of European bank CoCos has picked
up in recent weeks, with Royal Bank of Scotland PLC, Standard
Chartered PLC and UBS Group AG all issuing large deals.
The flurry of CoCo issuance has coincided with a fierce rally in
bond markets driven by investors betting on global central banks
keeping extraordinary stimulus in place for longer. Banks love to
sell them because they're a low-pain way of hitting regulatory
capital targets.
Yields on government bonds have plumbed new depths as investors
have pushed up prices. There is now over $13 trillion of bonds
trading at a negative yield, according to J.P. Morgan Asset
Management, up from hardly any at the start of 2014.
That has encouraged investors to scramble for securities
offering higher returns -- from emerging market debt to risky bank
securities like CoCos.
Investors piling into CoCos "is a great indicator of the current
strength of the global demand for yield," said Tom Ross, a
portfolio manager at Henderson Global Investors.
European banks have issued over EUR100 billion worth of CoCos
since 2012, according to CreditSights, to help build their capital
levels as part of a postcrisis regulatory initiative designed to
shield taxpayers from being on the hook for bank bailouts.
CreditSights estimates European banks will sell at least another
EUR100 billion of the securities in the coming years.
CoCos blur the traditional lines between debt and equity. They
don't have a fixed maturity like stocks, but they have a "call
date" when the bank is generally expected to redeem them, like
bonds. CoCos pay a regular coupon like a bond but, similar to a
dividend, this can be skipped at the bank's discretion, or if the
bank's capital cushion is too slender. They can also be written
down or converted into equity if a bank's key capital ratio dips
too low.
CoCos sold off sharply earlier this year as fears mounted that
Deutsche Bank AG would miss a coupon payment because the capital
cushion used to determine whether coupons are paid had gotten
thin.
The broader market has recovered somewhat since then. Investors
in European bank CoCos have now earned a total return of 2.8% so
far this year, according to Barclays. That compares to a
year-to-date return of minus 11.7% in February at the height of the
concerns over CoCos, and a positive return of 7.1% last year.
John Raymond, a senior European banks analyst at CreditSights,
said there have been various positive developments for CoCos, among
them the European Commission relaxing restrictions on when banks
can pay out coupons. The Bank of England has also helped by easing
capital requirements for U.K. lenders following the Brexit vote, a
move that should give these banks more leeway to continue paying
CoCo coupons.
According to Dealogic, there has been $27.8 billion worth of new
sales this year of so-called Additional Tier 1 bonds -- the name of
the main breed of CoCos issued by European banks. That is less than
half the $57.9 billion of these securities sold over the same
period in 2015.
But the recent CoCo deals appear to have gone well.
Investors have placed over $15 billion of orders for a $1.5
billion Additional Tier 1 bond expected to be sold by Barclays
Wednesday, according to a person familiar with the deal. The bond
is expected to pay an interest rate of around 7.875%, according to
that person.
A spokeswoman for Standard Chartered said there was over $20
billion of demand for the lender's $2 billion CoCo sold earlier
this month.
Mr. Ross at Henderson said he bought some of the recent RBS CoCo
bonds because he thinks the bank's creditworthiness is improving
and he liked the high coupon on offer. He is looking to buy the
Barclays bonds for similar reasons.
Even so, he said he is broadly cautious on the asset class given
its poor performance this year. He also has concerns over the
structure of the securities, which essentially behave like equities
if something goes wrong
"We have to weigh up those risks with the returns available,"
said Mr. Ross.
Write to Christopher Whittall at
christopher.whittall@wsj.com
(END) Dow Jones Newswires
August 24, 2016 13:11 ET (17:11 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Barclays (NYSE:BCS)
Historical Stock Chart
From Sep 2024 to Oct 2024
Barclays (NYSE:BCS)
Historical Stock Chart
From Oct 2023 to Oct 2024